It is one of the most important macroeconomic events that has created a lot of embarrassment not only among the public but also for the union government and RBI. It refers to the persistent rise in the general price level, i.e., in the price of goods and services.

It reduces the purchasing power of money and ultimately hurt the economy in many way:
1. Reduces savings or create a situation like forced saving.
2. A greater portion of income goes to fulfill basic requirements.
3. Interest rates increase.
4. Dampens investment
5. Domestic currency get depreciated and imports become costlier which again pushes up input cost and creating various circle like situation.

Causes of Inflation

Though causes of inflation aremulti-dimensional but broadly it could be expressed in tow forms:
(1) Demand-pull-inflation
(2) Cost-push-Inflation
It means that inflation is caused either due to increase in demand, because when demand will be high princes, will certainly go up and increase in the cost of production, or due to both.

Factors responsible for increase in demand could be envisaged as:
(1) Decline in output or production
(2) Increase in income
(3) Increasing population
(4) Mounting public expenditure
(5) Mounting expenses on social welfare
(6) Hoarding and black-marketing of essential commodities.
(7) Increasing procurement prices.
(8) More inflow of foreign currency etc.

Similarly, there are many in factors responsible to pushing up the cost of production:
1. Rise in wages.
2. Rise in the rate of indirect taxes
3. Rise in the price of raw materials.
4. Structural bottlenecks
5. Rise in the price of petroleum product etc.

Different forms of Inflation:
1. Open inflation
2. Suppressed inflation
3. Branded Inflation
4. Ratchet inflation
5. Shoe-leather inflation
6. Creeping Inflation
7. Walking inflation
8. Running
9. Hyper Inflation
10. Galloping
11. Runaway inflation etc.

Measurement of Inflation

It is measured with the help of price – indices. In India following types of indices are being prepared:
(i) W.P.I i.e, wholesale price index
(ii) C.P.I. i.e, consumer price index

W. P. I.

In India the headline inflation is measured with the help of WPI. If is based on the selected basket of commodities numbering 676 in the new series. It means that WPI is based on the rise and fall in the whole prices of these commodities.

This basket has been divided into three categories:
1. Primary articles: Here, number of goods are 102 and weightage to given to it is 20.118%

2. Energy and Fuel:
No. Of goods = 19
Weightage= 14.910%

3. Manufactured Items:
No. Of goods = 555
Weightage= 64.972%

Here, a notable thing is that the weightage of energy/fuel and manufactured items have been increased while in case of primary articles it has been reduced from 22.05 to 20.118%. If has been done on the basis of Angle’s law, as clarified by finance minister. Since, February 2012 the data of WPI is available only one monthly basis, though it is measured weekly, i.e,. on every Saturday, by the department of industrial policy and promotion (DIPP). The base year forWPI is 2004-05 in the new series but it is expected to be changed in the near future.

C. P. I.

Under CPI goods and services both are taken for measurement. It is prepared for the purpose of deciding dearness allowances and minimum wages. It is prepare by CSO on monthly basis. It does represent the overall prices in the country because it is based on the various segments of society.

So the four type of CPI is prepared:
(1) CPI (AL) – To decide minimum wages at agricultural labours
(2) CPI (RL) – to decide minimum wages of rural labours
(3) CPI (IW) – to decide the D.A. of central governments employees.
(4) CPI (UNME) – to decide the D.A. of employees of Banks embassies etc. (Discontinued by CSO from 2008)

Measurement of Inflation on Period Basis

1. Annual average inflation rate: It is the average of 52 weeks of inflation date but it could be available at the end of the year.
2. Point-to-Point inflation rate: It is measured on the basis of changes taken place between particular week of the last year and the same week of the current year. It is available throughout the year.

Some new proposed Indices:
(1) CPI for representing overall nation wide fluctuations in prices base on retail prices and later on in future it will replace WPI.
(2) Producers price index (PPI): It will measure the price pressure due to increase in the cost of raw materials.
(3). Services Price Index (SPI): Given the growing importance and contribution of service sector in the Indian economy the DIPP is planning to prepare this index.

Important Topics
1. Deflation
2. Recession / Depreciation
3. Reflation
4. Stagflation
5. Dis-inflation (slump-inflation)
6. Misery Illusion
7. Phillips Curve
9. Over heating of economy
10. Base effect

Courtesy: Mr. LS Mishra

Related Topics:

• Basic Economy

• Fiscal System

• Foreign Investment

• Monetary System

• Capital Market

• Inflation

• National Housing Bank - NHB